California faces painful transition

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During a recent small-group discussion of California's major economic and demographic trends (slow economic growth, high home prices along the coast, poverty inland, an aging population and young families leaving for opportunity elsewhere) a participant asked, what's wrong with that. He asked why California shouldn't be a wealthy enclave and Texas a place where things are built.

I've heard this sentiment before. Apparently, many people are perfectly happy with California becoming a place of haves and have-nots, and if the have-nots don't like it, they can leave. This person was honest enough to say it.

I think that there is plenty wrong with it.

It works in places such as Beverly Hills, because there are lower-cost areas nearby. The people who serve the wealthy can live close and commute. It doesn't work so well for Santa Barbara. There, perhaps 20,000 middle-income people commute in daily, but the drive is long and expensive. Many people don't have incomes high enough to pay the commuting costs. These people live in overcrowded housing. Often, several families live in a home or apartment designed for one family.

What happens when you try extending this model to an entire state? You create pain, lots of pain.

Economists use numbers to describe the pain, and California's numbers on unemployment, welfare and poverty are well-known. But the numbers can't describe the real pain; the pain that comes with a broken family, or the suicide of the breadwinner, or the abuse of spouses or children, or the prospect of a lifetime of poverty because of limited opportunity and an inadequate education.

Many of these costs are probably transitory. As California moves from its previously vigorous economy to a new, low-opportunity equilibrium, lots of people have been and will be displaced. It could take a very long time for the displaced to move or sort themselves out, but we can expect that they eventually will.

What will California look like after the transition?

There won't be much tradable goods or services being produced, with the exception of oil and agriculture. Tradable goods and services are those that can be produced in one place and consumed in another. Furthermore, technology is increasing the ratio of tradable services to nontradable services. Consider tax-return preparation. Even if a tax return is prepared by a person, computer software and new communication technology eliminates the need for close proximity.

California's population could be smaller than it is today. It will surely be concentrated along the coast. The inland population will probably decline. So, inland cities would face perpetual financial challenges.

Most importantly, California's population will be bimodal. One mode will be older and wealthier, and their incomes will be mostly independent of the local economy. The other mode will be younger and poorer, and they will provide nontradable goods and services to the wealthy. The middle class will be small.

Already, these trends are evident in upscale coastal communities. Eventually, this will be a problem, because there won't be a path out of the low-income population, and big income inequality combined with little opportunity is a prescription for serious social troubles.

Bill Watkins is executive director of the California Lutheran University Center for Economic Research and Forecasting and a CLU associate professor of economics.

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